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Compliance

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One Charter to Rule Them All?

With an optional federal charter on the Senate floor, insurers are considering the regulation's businessimplications and its impact on IT systems.

The Cost of Compliance

Under the current state-based system, insurers must comply with the regulations of each state in which they do business, resulting in different requirements for product filing, product rating and licensing. This makes compliance an arduous task for insurers doing business nationally.

"The current regulatory environment exacerbates speed-to-market issues that carriers face in striving for strategic competitive advantage," notes Mark Gorman, strategic advisor with TowerGroup (Needham, Mass.). "These issues include areas such as product speed to market and rate making."

Further, the dollar cost of compliance is a major burden to insurers, adds Gorman, who says the life insurance industry alone spends more than $1 billion per year on regulatory compliance under the state-by-state system. "For life insurance carriers, moving to a federal regulatory environment could cut costs up to 55 percent," he asserts.

An OFC also would reduce costs for large P&C companies, according to Joseph Beneducci, president and COO of Novato, Calif.-based P&C carrier Fireman's Fund ($4.3 billion in premium revenue). He estimates that Fireman's Fund spends $15 million a year on regulatory filings alone. "The cost of compliance has become significant, and with the savings [from an OFC] we could beef up our services to customers, such as providing more-extensive claims support," he says. While Beneducci acknowledges that "there will be quite a bit of work that will need to be done" on current systems if an OFC passes, he says, "In the end, I think it will make it easier on our IT department."

But for regional insurance carriers such as Westfield Insurance ($3.4 billion in assets), a Westfield Center, Ohio-based P&C insurer, the costs of revamping IT systems for federal regulation could be prohibitive. Dan Sondles, government relations and community relations for Westfield Insurance, points out that competition with larger carriers eventually could pressure small and regional insurers to switch to federal chartering even though they could opt to remain state chartered. "Small to medium companies may have to alter all of their technology because their resources are geared toward the states they do business in," he says. In addition, Sondles stresses, "Small companies may also lose their ability to be niche players because a federal charter would level the marketplace."

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